Forge thinks global

Forge Group chief executive David Simpson has forecast the engineering contractor will be a global operator within five years after acquiring US coal services provider Taggart Global for $US43 million.

“We want to be a global industrial engineering, construction and maintenance company," Mr Simpson, a former UGL executive, told The Australian Financial Review after making his first acquisition since becoming Forge’s CEO a year ago.

Pittsburgh-based Taggart, which builds coal preparation plants and handling systems such as bulk storage containers, will give Forge greater exposure to the US as well as to South Africa and China.

While almost three-quarters of Taggart’s earnings are derived from the US, it operates in South Africa through subsidiaries Jim Harrison Design Associates and LSL Consulting.

It also has a Chinese arm, Taggart Global China, that builds coal preparation plants and owns fabrication factories that can provide Forge with relatively cheap fabricated steel.

Although Perth-based Forge currently provides construction services to gold miners such as AngloGold Ashanti from Ghana, engineering work for African clients is done out of Perth.

“Taggart opens up South Africa for us," Mr Simpson said. “We will now have a full engineering, mining and construction business in Africa."

Mr Simpson is keen to diversify Forge away from Australia's high-cost operating environment into emerging markets, and to create more stable revenue streams for the contractor to hit financial targets of 15 percent compound organic growth over five years.

Related Quotes

Company Profile

Taggart will expand the Australian group’s asset management services business by giving it a maintenance services arm in the US.

Mr Simpson said he had no concerns about increasing Forge’s exposure to the coal industry - almost two -thirds of Taggart’s order book is related to coal - arguing coal prices were likely to recover over the next 18-24 months and that coal would continue to “fuel the world" for the next 30-40 years.

Forge would also benefit from Taggart’s research into clean coal technology to reduce sulphur dioxide and nitrogen oxide emissions, he said.

“Whether clean coal is legislated or not, it’s a bigger selling point for us."

Capital spending by miners in Australia was “not over" as the resources boom wanted, but was being targeted at smaller projects and contractors who could deliver services directly rather than sub-contracting to others, he said.

“Flat is the new growth."

Analysts at Argonaut said that while Taggart’s revenues were mostly derived from low-margin asset management businesses, the US group suited Forge’s strategy to diversify and lengthen itsincome and its order book, which will be around $1.4 billion following the acquisition.

“The trade-off for the longer-term revenue streams through operations and maintenance contracts will be lower overall margins," Argonaut said.

Forge has been diversifying away from Western Australia into the eastern states, recently winning a $290 million contract to provide processing facilities for MMG’s Dugald River zinc, lead and silver mine in Queensland.

Forge’s shares, which are down 9 percent year to date, fell 4.8 percent to close at $4.48.